Perhaps you know that both mainstream bananas and chocolate are threatened by blights. There is even talk of “bananas as we know them” going under, although I believe the hardier (and tastier) Brazilian bananas are in much less danger. They are also harder to grow, stack, and transport to the United States.
More generally, to the extent societies opt for monocultures, disease can threaten an entire crop. So when breeding and choosing genetic strains, do markets get this problem right? Or can we identify a systematic market failure? Will farmers produce too many kinds of corn of the same kind, or too few? For background, you might wish to read this Charles C. Mann article. Here are a few points:
1. In old line Chamberlain-style monopolistic competition theory, producers selected too many product varieties because product differentiation boosted their market power and thus their profits. Appropriately, people accused him of excessively differentiating his theory from that of Joan Robinson.
2. In the A. Michael Spence product quality papers from 1976-1980, producers with market power choose too little product variety, because they don’t sufficiently count the inframarginal gains from bringing new products to market.
3. There is now a risk/insurance argument. If you breed and grow a different strain or corn, or simply invest in keeping an old strain around, no single blight can wipe out all the corn. This is a kind of substitute for corn insurance markets. I have seen Taleb make a version of these arguments on Twitter, in an anti-GMO context.
4. Is crop insurance that imperfect? A corn blight won’t succeed right away, and in the meantime the price of corn is going up. If I am worried about this, I can go long corn. Admittedly, this is not a hedge for society as a whole against the loss of corn, though it is a hedge for individual investors or farmers. The biggest losers can purchase some protection.
5. Maybe you just love corn diversity, as I do. But sticking within an economics context, corn is a pretty small part of most people’s budgets in the United States, but not in rural Mexico. It is therefore a major potential problem in Mexico but not for most consumers in the United States. In the U.S., I suspect many corn producers are non-diversified and reap producer surplus, but I don’t have hard data behind those judgments. Rural Mexicans also find it harder to diversify through asset markets, though they diversify by painting amates and taking up other alternative occupations.
6. You will note that diversity of corn strains persist in rural Mexico, and to a great degree. It is the United States that has moved much more toward the monoculture. Of course there may be transitional problems, as part of Mexican agriculture modernizes, but some farmers are left behind with older strains and methods.
7. We can admit that not all gdp is created equally, but then which are the foodstuffs we really could not afford to lose?
7d. Water, a drink.
Yikes! But mainstream corn and bananas I can do without.
8. Does the Chamberlain mechanism in #1 outweigh the Spence argument in #2? In today’s food markets, I certainly think so. So given the risk of extinction, a market structure of monopolistic competition may in fact be better than perfect competition.
How do these arguments apply to the breeding of other living beings?